Nigeria: CBN Deducts N430 Billion from Banks as Short-Term Rates Decline

Amid economic uncertainties, the Central Bank of Nigeria (CBN) has imposed a substantial penalty of N430 billion on banks for their failure to lend 65% of their total deposits to the real sector. This move comes as local deposit money banks grapple with the challenging macroeconomic conditions marked by soaring inflation and a weakening naira.

The weak economic environment has affected banks’ willingness to extend loans, primarily due to concerns about rising default risks. Fitch Ratings has pointed out that certain Nigerian lenders are witnessing faster growth in their stage two loans than previously anticipated.

This trend was instigated by the naira’s devaluation, which led corporations to record significant foreign exchange losses in their financial reports. Data from the Nigerian Exchange has indicated that the first-half earnings reports of companies across various sectors have been marred by negative impacts resulting from revaluation losses.

Reports suggest that clients of banks in the manufacturing sector, as well as other industries such as consumer goods, retail, and commerce, are struggling to secure access to foreign exchange.

Despite the considerable debit linked to the increased cash reserves ratio, the financial system has remained relatively liquid. This has, in turn, kept short-term interest rates at lower single-digit levels, as reported by data from the FMDQ Exchange.

At the close of the previous week, the overnight interest rate experienced a slight decrease of 3 basis points, settling at 1.7%. Analysts have noted that this decline in interbank rates is supported by healthy system liquidity from the previous week and the inflows resulting from N10 billion worth of Open Market Operations (OMO) maturities this week.

These inflows have somewhat offset the impact of the week’s N430.43 billion cash reserve debit across the banking system. As a result, the system liquidity averaged a net surplus of N479.10 billion last week, compared to the N804.77 billion net surplus in the preceding week.